Discarding tax records too early could cause significant liability for your business.
The IRS, other taxing authorities, creditors, and investors all might demand to see a business's tax records. Without documentation, a company might have difficulty defending its deductions during a tax audit, applying for a loan, or obtaining new investors.
Knowing how long to keep tax returns and other records can help businesses respond to information requests. Additionally, owners can use this information to better understand their businesses.
Companies can safely discard most documents seven years after filing the related tax return—or seven years after the due date, if later. However, a few records require indefinite retention.
What Are Business Tax Records?
Business tax records include anything that directly or indirectly supports amounts claimed on the business's tax returns. Examples include:
- Invoices
- Cash register tapes
- Canceled checks
- Bank statements
- Receipts
- Credit card statements
- Real estate closing statements
- Bills of sale
- Tax forms
- Tax returns
Transactions usually generate these documents automatically. Businesses or their accountants then record the accounting effects of transactions and file the supporting records based on the type of transaction and when it occurred.
Digital file management systems offer many advantages, though companies must keep paper originals of some documents. Electronic files take up much less physical space, allow for easier access, and enable quick backup. As a result, many businesses manage their records almost entirely electronically.
These records allow companies to both prepare their tax returns and prove the return's accuracy during tax audits. The IRS and other tax authorities can deny deductions for unsubstantiated expenses, potentially leading to interest and penalties.
How Long Should Businesses Keep Tax Returns and Other Business Tax Records?
Fortunately, the IRS cannot assess additional tax once a certain period—called the statute of limitations—has passed. The federal income tax statute of limitations equals:
- three years from the filing date—or the due date, if later—for most tax returns
- four years after the tax becomes due—or gets paid, if later—for employment tax returns
- six years from the filing date—or the due date, if later—for tax returns that underreport gross income by more than 25%
- seven years from the filing date—or the due date, if later—of the related tax returns for losses from worthless securities or bad debt
- Forever for unfiled or fraudulent tax returns
Some state taxing authorities follow IRS rules, while others use different periods. Creditors and investors may have their own requirements.
Creating different retention policies for each possible scenario may prove impractical. Retaining tax returns and other records for seven years—starting from the later of the filing date and due date of the related tax return—offers a convenient rule of thumb. This covers almost all documents for businesses that file all required tax returns without fraud.
Many CPA firms and other tax practitioners retain tax records for seven years, though some keep them indefinitely in digital storage. Even businesses that entrust their records to a certified tax professional need to keep copies. The IRS and other taxing authorities can deny deductions that a company can't support, even if an outside professional lost the documentation. However, CPAs cannot deliberately withhold records, even for unpaid fees.
Business Tax Records to Keep Forever
Companies must keep certain tax records indefinitely. Assets usually have tax consequences upon sale, so the statute of limitations will apply to the future tax return that includes the asset sale.
Businesses also need to retain specific key documents forever. These include company formation documents and ownership records such as stock ledgers, titles, deeds, property records, and contracts.
Corporations must also keep shareholder meeting minutes. Failure to maintain corporate records could cause the corporation's owners to lose liability protection.
Missing documentation can cause substantial liability and missed opportunities. Keeping tax returns and other records for the appropriate period allows your business to respond to information requests, including tax audits.
While old files might contribute to your clutter, you can't just throw them away. Even if you never use them or reference them, the law might not allow you to toss them in the shredder. Depending on the type of file and the relevant laws, you might have to keep them anywhere from one year to three years to forever.
The IRS Rules
The IRS recommends you keep most tax-related records for three years. That's how long the IRS can look back for an audit if everything in your business is above board. If the IRS suspects you've under-reported income by more than 25 percent, it can audit you up to six years back, so it might be safer to use that as the timeline. Records include not only tax returns, but also whatever receipts, bills or payment records prove that your return is accurate.
You have to keep some files longer than three years. For employment tax records, the IRS recommends four years. If you have a business property you're depreciating or amortizing, keep the records until three years after the date you finally dispose of the property.
State Retention Requirements
States have tax laws too, and some of them require a longer holding period than the IRS does. California, for example, gives itself four years to audit your state tax returns, possibly longer if you're subject to a federal tax audit. If the state suspects you of fraud, the deadline can stretch out to twelve years.
Special Records Rules
State and federal laws set different requirements for some types of records. Virginia, for example, requires doctors to keep patient medical files for six years, unless the patient switches doctors. If the patient is a child, the medical practice has to keep the files until the patient turns 18.
Your Insurance Files
Insurance files can be a special case. Negative effects of manufactured products or on-the-job injuries might not be obvious at first. It might take years for an employee to discover, for example, that products manufactured at your factory gave him cancer. Once the employee learns of the connection, he can file a claim or lawsuit for compensation.
You'll need records to show that you had occurrence-based insurance at the time you were producing the cancer-causing products, so hang on to the relevant files indefinitely. Other types of policies don't need such a long holding period.
Company Personnel Files
Companies often get in trouble when choosing who to hire, who not to hire, who to fire or who to promote, which is why federal law applies to those records too. Generally, you have to store personnel files for a year. If you fire someone, keep those files for a year after termination. You must keep payroll records for three years.
If your company doesn't pay men and women equally, you need to document the reasons and keep those records for at least two years. State laws may set longer periods.